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Sunday, February 12, 2006

bouncing off tangents

In all the activity of investing, it's always good to remember the goal: making a lot of money. A guy named Kevin just started MarketMoneyLetter and gave a good introduction.
I believe in making money. That might sound silly, but many people don't care. They want to be "socially responsible" or they want to "“stick to what they know"”. That might work, but that'’s not for me. I like to extrapolate any opportunity I can from the market, and I find it's a lot harder when I limit myself to investing,” “trading, “options,” “growth,” or “value”. Instead, I believe all of these strategies have merit and are potentially profitable.
As far as "sticking to what you know" goes, I've found it very useful and often profitable to learn new things: when you run into something you don't know, take some time to learn it. For instance, when I was looking at investing in Washington Mutual years ago, I realized that I knew very little about banks. I read the book The Bank Director's Handbook which was a great overview of how a bank works and what can go wrong. I also spent a lot of time on the FDIC database. The knowledge I got has helped in understanding a lot more than just banks. The FDIC has a list of red flags for banks which is contained in the fraud section of their Manual of Examination Policies. I found that to be extremely helpful in understanding how fraud works (the tricks, the methods of hiding it, the ways in which it shows). The fraud section of The Bank Director's Handbook is a great companion to this.

If I hadn't stopped and taken the time to attempt to expand my circle of competence, I never would have learned that stuff.

But anyway, it's easy to lose sight of the goal of making money. I see a lot of people on the Berkshire board on Motley Fool who seem more interested in being associated with Berkshire and with clinging to dogma than with making money.

Let me just explain something about what's wrong with dogma. The way I understand this is via the game of Go (which provides me with a lot of knowledge that I find very difficult to translate into language). People who study the game often study joseki, which are standard sequences of moves in very small parts of the board. The funny thing is that joseki involve standard moves by both competing players and they are considered the best possible moves in the absence of anything else happening on the board. Sometimes you'll find players getting angry because their opponent doesn't follow the joseki sequence, which by itself is pretty humorous. But studying joseki is fairly useless unless you study why those are the optimum moves. If someone plays a non-joseki move, you should know why that move is bad and how to take advantage of it. But in reality, there are often situations on other parts of the board which make the joseki move bad. People who simply memorize joseki moves are essentially practicing dogma.

And in the real world, dogma is bad for the same reason. Without being able to derive why a particular behavior leads to making less money, you aren't able to recognize situations where the dogma is flat wrong. And it often is wrong. I'm very enthusiastic about game theory and how it will improve the world in the future. The reason is that it essentially derives the reasons why what we think of as common sense is more effective than what we think of as, well, stupidity. As I put in my Motley Fool profile quote, I expect game theory to eventually prove the validity of the behavior of successful cultures and show the self-defeating nature of the behavior of unsuccessful cultures. And all the re-distribution of wealth and power won't change that.

So I welcome a fellow investor who is interested in making money into the blogosphere. I argue that we make money when we're making the market more efficient: either softening the highs and lows or making prices reach value faster. That's good for the markets and good for the economy. So let's go out there and make a lot of money and not feel bad about it.

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